Energy Trends Insiderhttp://www.energytrendsinsider.com
Energy industry news & analysisSat, 03 Jun 2017 17:14:55 +0000en-UShourly1http://wordpress.org/?v=3.5ConsumerEnergyReporthttps://feedburner.google.comNotice: New R-Squared Is rrapier.comhttp://www.energytrendsinsider.com/2017/06/03/notice-new-r-squared-is-rrapier-com/
http://www.energytrendsinsider.com/2017/06/03/notice-new-r-squared-is-rrapier-com/#commentsSat, 03 Jun 2017 17:12:17 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19705It’s a work in progress, but the new R-Squared is at rrapier.com. I will put up a new post there at least once a week for the foreseeable future. The site layout is only temporary until I have time to fix it up a bit more.

The latest post there is The Strategic Petroleum Reserve May Have Outlived Its Purpose. I haven’t yet decided whether to implement the Disqus commenting system that we have here. Doing so causes old comments from the old Blogger format (and there are thousands) to disappear. I have yet to figure out a solution to that.

]]>http://www.energytrendsinsider.com/2017/06/03/notice-new-r-squared-is-rrapier-com/feed/0Contact Information And Blog Migration Updatehttp://www.energytrendsinsider.com/2017/05/19/contact-information-and-blog-migration-update/
http://www.energytrendsinsider.com/2017/05/19/contact-information-and-blog-migration-update/#commentsFri, 19 May 2017 21:49:19 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19679I have been stretched pretty thin lately, or I would have already addressed this. Writing a blog started for me as a hobby in 2005, but it has led me places I couldn’t have imagined. That is because of readers like you who have made this a worthy endeavor over the years. So let me first thank all of you from the bottom of my heart.

There are two updates I need to provide for readers. Please indulge me as I try to give you a behind-the-scenes look that hopefully explains a few things.

I have had many people over the past month tell me that my email address connected to this blog, rapier@energytrendsinsider.com, is bouncing. As a result, I may have missed some important emails. If I didn’t respond to an email, that might be why. Or it could be that I simply haven’t gotten to it yet.

This morning there were 436 emails in my inbox. I have to prioritize them quickly. If I receive a simple query, I will probably respond with a simple answer. If you are a student seeking help with a project or thesis, I will try to help as much as I can. If you are a reporter, I will try to answer your query. But this all takes time, so please understand if my response to your email is brief, or if I am not prompt in getting back to you.

If you are looking for an updated email address, for those who don’t know, my Gmail address has always been embedded in my CV. I have had many people let me know that my contact information is hard to find. That’s by design to manage my email flow. The easier it is to contact me, the more junk email I get. So if you do get a bounced email from me, try my Gmail.

Why don’t I just fix the “energytrendsinsider” email? That gets into the second part of what I want to discuss. I started writing on Blogger in 2005. In March 2010, I agreed to move to this current site (initially Consumer Energy Report) and make this my home base. I have been writing here ever since.

But my outside commitments have grown. I have a day job with an Arizona-based company called ZHRO Power, LLC. My primary role has been to develop a solution to oilfield flaring. I won’t go into detail, but you can read about that here. Also, I have a job with Investing Daily. I write a pair of weekly energy columns there, and then I write a subscriber-only newsletter for them and manage a paper portfolio of stocks.

Beyond those two jobs, I write a weekly column for Forbes, regular columns for the GE Power Blog, and if there’s any time left I sometimes squeeze in some additional freelance writing. This blog often falls to the bottom of my priority list.

I do not own this site where my blog is located. I don’t even have full administrative rights to fix certain things, like the bouncing email issue. That was partly by design. One reason I came here was to limit the amount of peripheral stuff I had to do associated with a site. But it has also created limitations. That, along with the other outside demands, has resulted in my output here falling dramatically in recent years.

After considerable thought, I have decided to migrate my blog to my own domain and hire someone to help with the upkeep of the site. I have in mind something like Robert Bryce’s site as a template for what I want to do. I will host columns that I have written elsewhere (many have asked me to republish my Forbes articles because they don’t like wading through the ads), and any original content that I want to share that doesn’t fit the Forbes format.

It’s going to take some time to set everything up, but that’s where things are headed. Until then, you know where to find me. When the change happens, I will announce it on on Twitter, LinkedIn, and Facebook as well. But this will be my last column here.

]]>http://www.energytrendsinsider.com/2017/05/19/contact-information-and-blog-migration-update/feed/4Guest Post: Offshore Wind Power Cost Updatehttp://www.energytrendsinsider.com/2017/04/20/guest-post-offshore-wind-power-cost-update/
http://www.energytrendsinsider.com/2017/04/20/guest-post-offshore-wind-power-cost-update/#commentsThu, 20 Apr 2017 22:50:01 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19643Today I bring you another post from returning guest Todd “Ike” Kiefer who draws some lessons from the decommissioning of the world’s first offshore wind farm. Mr. Kiefer’s biography can be found at the end of the article

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Offshore Wind Power Cost Update

by

Todd “Ike” Kiefer

Decommissioning of world’s first offshore wind farm offers an opportunity to see how industry costs have changed over the past 25 years.

Lifetime Performance of World’s First Offshore Wind Farm

The first offshore windfarm in the world has just been decommissioned and is now being torn down. Its lifetime performance specs are illuminating in comparison with recent wind industry data, and alternative generation options.

1. While turbines are getting larger, able to operate at lower wind speeds, and improving their capacity factors, the total lifecycle cost per unit of energy provided from offshore wind has not perceptibly decreased from 1991 to 2015. Higher costs of O&M for larger turbines farther offshore seems to consume savings from higher capacity factors.

2. As it is uncontrollably variable and weather dependent, offshore wind generation remains uncompetitive with gas and coal which are half the cost (~ $70/MWh LCOE) while providing fully dispatchable and weather-independent power that is of much higher value to a power grid.

Biography

Captain Todd “Ike” Kiefer, USN (ret.) is director of government relations and economic development for East Mississippi Electric Power Association and president of North Lauderdale Water Association. His career in public utilities follows 25 years as a naval officer and aviator. He has degrees in physics, strategy, and military history, and diverse military experience that spans airborne electronic warfare, nuclear submarines, operational flight test, particle accelerators, Pentagon Joint Staff strategic planning, and war college faculty. Deployed eight times to the Middle East and Southwest Asia, he spent 22 months on the ground in Iraq and Commanded Al Asad Air Base and Training Squadron NINE. Author of several published papers on energy and energy security.

Over the years, I have often pondered what the world’s ultimate oil production might be before it peaks and inevitably declines. I can recall around 2005-2007 on the website The Oil Drum, that there was a raging debate about just how close the world was to peak oil. Some insisted that it was happening right then. Others, like myself, were in the camp that we still had a few more years and a few more million barrels per day (BPD) of production to go. Those who thought the world would ever reach 100 million BPD were definitely in the minority.

Today I bring you a post from returning guest Todd “Ike” Kiefer who makes an oil production estimate that is far beyond anything I would have personally imagined. He takes on a topic that I have also addressed in the past – the accuracy of some of M. King Hubbert’s estimates. Some will dismiss Kiefer’s estimate out of hand, but I can say from experience that most who dismiss these estimates haven’t done any sort of rigorous estimates to come up with their own estimates. They will just say things like “keep dreaming.” That’s not a very helpful approach. If you disagree with the work, please critique the logic and the numbers.

Contrary to widespread misunderstanding, Dr. Marion King Hubbert did not fit a generic or Gaussian bell curve to his data plot of oil production numbers. Rather, his eponymous curve is a specific mathematical construct that emerges from his mathematical assumptions. I will show below why I believe that those assumptions and the curve are both wrong, and suggest a substitute curve and worldview for crude oil production. The real power of a theory is its predictive power. Based on my modeling and analysis, I predicted in 2012 the exact level of U.S. oil production at which prices and production would collapse in 2014. The same methodology leads me to predict that U.S. crude oil production will perpetually seek a natural level of 9.5 Mbpd (mmbpd), and that global oil production/demand will continue to grow to eventually plateau at approximately 160 Mbpd.

The Math of the Hubbert Curve

There are dozens of different mathematical functions that yield bell-shaped curves. The “Hubbert” or “Peak Oil” curve is actually a special case of a class of s-shaped curves called sigmoids. While most sigmoid functions begin and end at different values, Hubbert’s curve is constrained to begin and end at zero by the formula and boundary conditions imposed that represent a perfect mathematical translation of Hubbert’s worldview. The curve reflects a battle between two competing forces or trends – one for growth and one for contraction – where the balance shifts between the two along the way.

The curve is usually plotted as the annual quantity of oil produced on the vertical scale against the year of production on the horizontal scale. However, the math of the curve is best understood as a differential equation relationship between the rate of oil production (dQ/dt) and the cumulative quantity of oil so far produced (Q). This is because Hubbert derived the curve by assuming the forces that affect oil production were related to Q, not a function of the year of production. There are three variables that are adjustable to shape the curve: first is Q0 that starts the curve and is usually set to be zero in the year 1859 when the first commercial oil was produced in the USA; second is a rate scalar r that symmetrically adjusts the steepness of the rising and falling slopes; third is Qmax – the postulated maximum amount of oil which can ever be produced from the geographic area under consideration, and which corresponds to the area under the curve. By adjusting r and Qmax, Hubbert and his acolytes have been able to get a good fit to historical U.S. oil production through about 1990 with some significant caveats. Hubbert’s 1956 predicted production curve for USA based on his estimate of total recoverable reserves of 200 billion barrels is shown below. It is followed by a plot of his curve overlaid with actual historical production through 2015.

Figure 2 – Excerpt from Hubbert’s 1956 Paper (annotated)

Figure 3 – Hubbert’s Curve v. Historical U.S. Crude Oil Production

The formula for the rate of production dQ/dt shows the two trends that are competing with each other. First there is a term rQ that tries to increase production in linear proportion to how much oil has already been produced. This term essentially models a scenario where more oil production stimulates proportionally increased consumption, driving more producers to enter the oil business and drill more wells. Unchecked, this portion of the formula would cause the curve to grow exponentially. However, the check comes in the second term, 1- Q/Qmax, that applies brakes on the rate of production in proportion to how close Q approaches a pre-determined maximum value. The second term essentially models a scenario where there is a fixed amount of a resource in the ground and it becomes harder to find and extract as the balance remaining decreases. Qmax is the key assumption and guiding worldview of Hubbert’s approach and curve. The two terms work together to produce a symmetric sigmoid, where unconstrained growth dominates initially, but is eventually overtaken by insurmountable resistance, and production reaches zero as Q reaches Qmax. Hubbert’s curve is an elegantly simple model of more and more people looking for a scarcer and scarcer resource.

Limitations and Hidden Assumptions of Hubbert’s Worldview:

The Hubbert curve is appealing because of its simple logic and because of its close apparent fit with the data through the U.S. production peak in 1970. But is the math too simplistic? Indeed, there are three principal weaknesses that flow from questionable assumptions. First of these is that Hubbert simplistically focused only on production, with no separate consideration for the demand side of the economic equation. Whatever is produced is assumed to be readily consumed and thereby to maintain a constant economic pressure favoring increased production (i.e., keeping the rate coefficient r positive and stable). Secondly, he assumed that scarcity alone limits production, as discussed above. Thirdly, his approach has baked into it the assumption that the rules are largely fixed for the entire lifespan of production – particularly the rule that oil is monotonically more difficult to extract with every barrel. To be fair, Hubbert did allow for some minor growth in reserves over time due to continued exploration and improving technology, and this is seen in the fattened post-peak tail of his curves as plotted in his 1956 paper. But he did not allow for the possibility that technological progress and evolving geophysical understanding might be great enough to actually reverse the overall trend of slowing production that was supposed to be inexorable beginning with the 1952 inflection point he saw in U.S. production data and built into the Hubbert Curve.

In the case of U.S. oil production, Hubbert also made a fourth mistake – he assumed a self-contained economy where U.S. production was firewalled to satisfy U.S. consumption. The truth is that oil was already well-established as a global commodity by 1956, and it has only become more so with time. Today there are more than 80 countries offering crude oil for sale on the global market. U.S. refineries were never obligated to buy only domestic crude, but rather shopped the international market for best price. In the real world where oil-producing nations compete, oil production is a function of market share (the demand side of the equation intrudes again). And, since the bulk of U.S. oil company exploration and production investment from WWII forward was overseas, it is only natural that the fruit of that investment would be overseas. The “lower 48” U.S. production data that Hubbert was trying to fit with his curve does not include imported oil resulting from U.S. capital investment in Saudi Arabia and Nigeria and many other locations that arguably produced U.S. oil, regardless of nation of origin or subsequent nationalization of assets.

History has invalidated each of Hubbert’s assumptions. A host of technological and scientific innovations has dramatically recalibrated reserves, costs, and efficiencies for both terrestrial and offshore oil. Whole new realms of reserves have become accessible and economic, including terrestrial source rock and offshore “pre-salt” oil, upending long-held geologic assumptions. As oil production has continued beyond the 1970 U.S. peak, neither the U.S. curve nor the global curve has cooperated in following the mathematical predictions. Instead, U.S. production has waxed and waned and waxed again dramatically reflecting how, like all commodities, oil production remains responsive to factors which have always affected competitiveness and market share such as government policy and regulation, capital investment cycles, and economic boom and bust cycles.

Hubbert’s initial prediction in 1956 was that U.S. oil production would peak between 1962 and 1967 at no more than 3 billion barrels per year (8.2 Mbpd) based on 200 billion barrels of ultimately-recoverable oil. His global prediction was for production to peak in 2000 at 12.5 billion barrels per year (34.2 Mbpd) based on 1.25 trillion barrels of ultimately recoverable oil. Instead the USA has now twice peaked at 3.5 billion barrels per year (9.5 Mbpd). Global production has already exceeded Hubbert’s estimate of ultimately recoverable oil, and global proved reserves have been growing faster than production on a secular basis since 1980. Global crude oil production is already 150% of his predicted peak production rate and still climbing. However, those who have convinced themselves of the Peak Oil thesis see the world ever on the edge of their imagined cliff, and they hail every momentary dip in production due to acute economic or supply disruptions as the beginning of the end of oil.

Apologists have tried to excuse Hubbert’s poor fit with U.S. production data after 1970 by saying he could not have anticipated Alaskan oil. But he probably also could not have anticipated the fact that the oil-saturated California coast he did include would soon be virtually barred from oil production for political reasons, and this would have reduced his production estimates. Another contrived effort to redeem Hubbert’s prediction consists of ignoring all production that falls outside a recently invented narrow categorization of “conventional oil.” Some define conventional oil by its extraction methods (migrated crude in shallow terrestrial reservoirs accessed with vertical rigs). Others define conventional oil by its viscosity and the characteristics of the oil-bearing rock (API gravity >10, porosity > 5%, permeability > 10 millidarcies). Peak Oil theory is thus supposedly excused from failing to address the flood of new, light, sweet crude being produced by directional and horizontal wells from terrestrial source rock and ultra-deep offshore reservoirs. Earlier generations of oil producers would have viewed conventional oil differently as the years marched on and technology progressed. Conventional oil for thousands of years would have been asphaltic bitumen in surface pools or sand formations. For much of the 19th century, it would have been oil produced from human-powered drilling of wells less than 100 feet deep and east of the Mississippi river. Even using the modern and specious categorization of “conventional oil,” there is no evidence of a peak or cliff in global crude production, but rather continued responsiveness to capital investment. So obvious has been the absence of the predicted scarcity that many governments and activist organizations are now frantically trying to figure out how to pile on new regulatory and tax burdens to keep oil production and consumption from accelerating further. Concern about scarcity has been replaced by concern about how to “keep it in the ground.”

Figure 4 – Global Peak Oil Predictions

A New Curve

Rather than trying to patch up the Hubbert theory, it is past time to reconsider the assumptions and choose a better curve. The better curve is the classic sigmoid, also known as the logistics curve. The logistics curve is one of the most ubiquitous naturally-occurring mathematical forms in science and nature, empirically emerging as titration curves in chemistry, population growth curves in biology and demographics, and market penetration curves in economics, to name but a few. The math of the logistics curve is very similar to the Hubbert curve, but it substitutes P (the rate of production) for Q (the quantity of production), where P = dQ/dt. In other words, the logistic function is essentially the integral of the symmetric sigmoid – where Hubbert’s curve was limited in maximum quantity of production, the logistic function is limited in maximum rate of production. So the first term in the logistics equation produces exponential growth in the rate of production, and the second term sets a maximum boundary on the rate of production. Instead of total oil production being limited by Qmax, oil production rate is limited to Pmax, which in logistics terminology is known as a carrying capacity. Such natural limits to growth often appear in complex systems with many interdependent variables.

Whereas Hubbert was modeling only the throttling effect of a single variable (i.e., scarcity of oil), real life is much more complicated. Production of oil is a function of many things other than oil: capital, labor, mineral rights, exploration technology, extraction technology, refining technology, geopolitical stability, trade barriers, economic stability, demand, market competitiveness, substitution, etc. At any moment in time and any particular location, any one of these might be the ultimate limiting factor. And in the aggregate, factors other than scarcity of crude oil appear to dominate. In fact, other factors seem to be so dominant that crude oil production appears to follow the trajectory of a renewable resource, with reserves and production still continuously growing to fill petroleum’s niche share of the global energy market.

When applying the logistics function in the field of population growth, it is understood that people themselves are a renewable resource, and the asymptotic limit occurs where balance is achieved between birth and death rates. In oil production, the natural emergence of the logistic curve and its approach to a sustainable limit seems to describe a dynamic balance between new well development and existing well decay, rather than the exhaustion of oil. There is no need to attribute this limit to any single factor – it is most likely a confluence of many factors that have in the past and will continue in the future to constrain oil production across time and geography. Biology and physics themselves are powerful constraints.

Biophysical Limits to Growth

The best conception of human civilization is as a giant collective organism. We happen to be an autotrophic organism that uses technology to make food (high-quality, readily assimilable energy) from crude resources in the environment. We have learned from studying the physics of living things that there are biophysical constraints on the size and density of organisms that arise from bottlenecking of energy and waste flows. It is fundamentally a geometry problem. As a creature grows larger, its demands for food and production of wastes scale up in proportion to its mass, which scales as the cube of its size. However, energy and waste are exchanged across membranes (lung walls, air intake screens, heat exchanger surface area) and through tubes (e.g., blood vessels, pipelines) whose cross-sectional areas scale as the square of size. Thus the demands for energy and waste flows increase with size at a higher order than the means to satisfy them, and this creates natural, internal, structural barriers to growth – i.e., carrying capacity limitations. These limits exist even if the energy sources and waste sinks external to the organism are unlimited. This straightforward power and waste engineering challenge is what limits the size of termite mounds and cruise ships. It follows that continued growth depends upon ever more concentrated fuels and wastes.

Concentration of energy is measured in metrics of energy density, power density, and energy return on investment (EROI). Each of these attributes of energy has power to constrain the growth of civilization and its resulting demand for oil. And the actual trajectory of the growth of civilization and its energy appetite so far indicates that these broad energy factors in general, rather than oil scarcity in particular, are indeed what is shaping growth. The interdependence of growth with energy density, power density, and EROI also explains why the progress of civilization has been in step with migration to ever more high-performance energy sources. We have moved from agriculture (annual harvestable power density of ~ 1.0 Watt per square meter of land cultivated) to the Wright Flyer (110 Watt/kg of gasoline and engine) to the Space Shuttle (10,200 Watt per kg of LH2, LO2, and engine). And it is why biofuels and PV solar and wind turbines, with lower EROIs and far lower densities, cannot sustain existing developed nations at their current energy-intensitive standard of living without support from fossil fuels and nuclear power.

Follow the Data

Below is a logistics curve fit I did in 2012 for U.S. oil production data available at that time. I have since updated the data through 2015 (most recent available), but have had no need to adjust the curve. The logistics curve best fit to empirically match the data revealed a natural plateau for U.S. production of about 3.5 billion barrels per year (9.5 Mbpd). A positive and premature spike to that level in the early 1970s was explainable by a set of special circumstances including a surge in Vietnam, the Apollo program, record cold winters, and the oil embargo. Alaska oil production, rather than being an anomaly, actually appeared to be a natural progression that fit the curve perfectly. A major break with the curve occurred in 1986, which was a year when the global oil market belatedly recognized a glut of overproduction, and prices collapsed for a period that would last 17 years until 2003. U.S. domestically produced oil, made uncompetitively expensive by the world’s most restrictive drilling policies and environmental regulations, could not compete, and market share quickly dwindled even as global production and consumption continued to rise. And the oil not produced in the USA was displaced by imported oil, much of it the fruit of U.S. oil company investment overseas. Thus the dip in the curve was more about market share and EIA accounting limitations (no data tag to denote overseas oil production that is the fruit of U.S. foreign investment) than about domestic crude oil scarcity. However, a coming revolution in domestic production would indeed show up in the data.

Figure 5 – Kiefer Curve

Based on 3 previous boom and bust cycles in global production in the 20th century, it was clear that it was only a matter of time before the march of U.S. technology would improve oil exploration and production efficiency enough to again make U.S. domestic production competitive and recapture market share. In fact, this was already well underway in the form of a massive wave of capital investment by the world’s remaining privately held oil and gas companies benefiting from the rising prices accompanying another cycle of perceived scarcity that had arrived in 2003. As had happened many times before in its history, panic about the end of oil helped create profit margins that financed the investments that renewed the supply. By 2006, all of the technologies that enabled the fracking revolution were already fielded (3-D seismology, directional and horizontal drilling, sophisticated bore-head sensors and real-time telemetry, bore cementing and sequential perforation, hydraulic fracturing, advanced drilling fluids and proppant, etc.). Additionally, the first commercially successful ultra-deep “pre-salt” offshore well in the Gulf of Mexico was drilled in 1993, and by 2007 similar wells were being drilled off Brazil, ushering in another revolution of less notoriety but likely equal import with fracking that has yet to really make itself felt. Both of these revolutions depend upon specific technology and expertise for which the USA is unsurpassed. The stage was set by 2010 for U.S. oil production to come roaring back. The trend lines in 2012 indicated that U.S. production would reach the logistic curve carrying capacity of 9.5 Mbpd sometime before the summer of 2016.

In January of 2014 I specifically predicted a price collapse to $50-$60 bbl approaching this natural limit. According to EIA data after the fact, U.S. crude oil production hit 9.0 Mbpd in September 2014 and peaked at 9.6 Mbpd in April of 2015. WTI Cushing spot price peaked at $108/bbl in June of 2014 before beginning the plunge that would see prices below $50/bbl by January 2016. Current U.S. production is stable at 8.8 Mbpd. I expect to see U.S. production remain at or a bit below the 9.5 Mbpd limit, though not dip as low as it did following the 1986 glut. This is because most global oil companies have now been nationalized and foreign innovation and technology migration is thus slower today, allowing the USA to maintain a more enduring competitive advantage and preserve more market share. Private land and mineral rights ownership is also key to the economics of oil and gas, and this almost exclusively favors the USA as well. I don’t believe perceived scarcity will again come into play to significantly boost prices for well beyond a decade. Of course the global market is always susceptible to short-term spikes from geopolitical crises.

The Global Carrying Capacity for Crude Oil

We have already seen that Hubbert’s prediction for U.S. oil production was pessimistic and completely failed to predict our current condition. His prediction for global production was equally flawed.

Figure 6 – Hubbert’s Global Oil Prediction

According to Hubbert’s prediction, 2017 global crude oil production should be 12 billion bbl/yr and falling irretrievably. Instead it is over 30 billion bbl/yr and climbing steadily. And while oil is now being more properly priced as a premium transportation fuel and industrial feedstock rather than as a bulk combustion fuel, there is still an unquenchable thirst for this commodity in the developing world representing a huge latent demand. Applying the same logistics curve fit technique to global production data is illuminating.

Figure 7 – Kiefer’s Global Oil Prediction

If trustworthy, this logistic curve shows that global production and consumption are only halfway to the natural plateau. You can see in the figure some reasons for why progress may have departed from the ideal curve to a more linear path of growth. These factors include international market dysfunction beginning in 1971 due to U.S. abnegation of Bretton Woods and the subsequent global transition to pure fiat currencies and floating exchange rates, the emergence of the OPEC cartel, socialist evolution of western nations leading to crippling debt and tax burdens, nationalization of reserves and oil companies, implementation of restrictive environmental regulations and anti-energy policies, etc. The fiscal economy of the entire globe is way over-leveraged and is operating with a huge debt drag on it. All ability to stimulate economies with monetary policy and cash injection has been exhausted by the governments and central banks. The only way out now is for a massive influx of cheap energy to cause a surge in the creation of goods and services that will elevate the real gross world product to catch up with the global money supply, and thereby reduce the leverage. Right now, the USA seems to be uniquely positioned to benefit from the cheap energy revolution of fracking, while pre-salt hydrocarbons may be more globally accessible.

Nevertheless, continued growth in global production toward the predicted carrying capacity is my prediction – one which will not bring much comfort to those who demonize CO2 and think the Earth is on the knife edge of climate catastrophe. I’m not sure which nations will be contributing which fractions to this production plateau, but I believe it will come to pass. Even if the world added a new 2,000-megawatt nuclear plant every week for the next 50 years, we would not displace the need for this energy, particularly for air and sea travel, when the growing demand of developing nations is considered. Fortunately, fossil fuel energy has proven an excellent resource for helping civilizations cope with a host of threats. Hydrocarbons excel at reducing human exposure to and harm from severe weather, and in making crops much more fruitful and far less dependent upon the vagaries of nature. Climate change adaptation and mitigation would appear to be the only reasonable strategy going forward, as it has been for all of human history.

Finite v. Sustainable

If the logistic curve is indeed the better fit than the Hubbert curve, what does that tell us about the underlying commodity and the forces shaping its production? The essential difference between the two curves is that a Hubbert curve describes a finite resource whose production is being choked down by scarcity, while a logistics curve describes a sustainable resource who production is stabilized by any of a host of natural limiting factors at a level below which scarcity comes into play. The question of finite v. sustainable is really where the prevailing worldview is most challenged.

For oil to appear to be a resource that can be sustainably consumed, there are two possibilities. First is the case that the amount of ultimately producible oil is very, very large compared to its stabilized consumption rates, and essentially dwarfs demand, so that true scarcity will not be a factor for a very long time. A second possibility is that oil is indeed a renewable resource, and that the geologic processes that created the oil already extracted are still at work creating more at a significant rate compared to consumption – there is the potential for balance between demand and supply. A combination of these two is also possible. Experienced petroleum geologist and geophysicist David Middleton recently submitted an excellent online essay on what is known and theorized about the thermogenic processes that produce oil. He makes a point about how much reservoir quality sedimentary rock there is in the oil and gas zones of the Earth’s crust. The amount is so vast that every millionth part of it can hold 100 billion barrels of oil, though we really don’t know how much of it is charged with oil. Additionally, there is no reason to assume that the Earth is not continuing to cook more crude oil from existing kerogen in the crust. Pre-existing oil and kerogen may be enough to sustain the logistics curve of consumption for generations, or for millennia. If there should prove to be any truth to the controversial theory of abiotic oil formation from rock and seawater in the deep crust, this would only add to the Earth’s endowment of hydrocarbons available to man.

There are other reasons why I hold to the sustainable oil view, including my own research and analysis of fossil fuel energy return on investment (EROI) and oil production versus drilling effort. An essential part of this analysis that many get wrong is to ignore the often lengthy delay between oil industry capital investment and ROI. During the crisis window of perceived scarcity, there is much capital investment and negative cashflow as a flurry of wildcatters chase prospects. Once the glut is recognized, the capital investment dries up and there begins a lean period of low prices which includes a painful battle for market share and brutal consolidations, as most of the wildcatters fold up and are absorbed by larger companies with more fat to live on. Then finally comes a long period of steady, profitable production from reserves that seem to miraculously grow and grow without much further investment – this is the payback period that is usually ignored because the crisis is long past. Any ROI or EROI analysis that does not include the full bust-and-boom cycle will yield false results. When the accordion-effect lag between capital investment and ROI is properly considered, U.S. oil production EROI has remained above 10:1 for its entire commercial history, except for brief dips associated with recessions. Oil yields today are still about 40 barrels per foot drilled, the same as in the mid-1980s, only now we are drilling horizontally as well as vertically. If scarcity starts to rear its head as an emerging force in shaping oil production, we should first see it in irretrievably falling EROI and yield per foot.

The ultimate limiting factor for energy consumption is human population. The good news is that birthrates continue to fall, and they fall the most where energy intensity is highest. This is another self-regulating externality not accounted for in Hubbert’s theory. The worst-case prediction from the U.N. today is a peak of 11 billion people by 2100. Based on the trend lines of energy and other resource consumption, that appears to be within the carrying capacity of the Earth as enabled by evolving human technology. I believe a strong case could be made that more rapid economic development of underdeveloped nations using the highest EROI energy available would lead to a lower peak population and a smaller perpetual burden on the Earth’s resources. This is exactly the opposite of what restrictions on CO2 emissions are achieving by putting the brakes on development. The correct worldview of energy is essential to making good energy policy and genuinely helping humans and the environment. The evidence is that crude oil today remains a plentiful and high-performance resource with considerable prospects to grow in production and consumption for another century.

Biography

Captain Todd “Ike” Kiefer, USN (ret.) is director of government relations and economic development for East Mississippi Electric Power Association and president of North Lauderdale Water Association. His career in public utilities follows 25 years as a naval officer and aviator. He has degrees in physics, strategy, and military history, and diverse military experience that spans airborne electronic warfare, nuclear submarines, operational flight test, particle accelerators, Pentagon Joint Staff strategic planning, and war college faculty. Deployed eight times to the Middle East and Southwest Asia, he spent 22 months on the ground in Iraq and Commanded Al Asad Air Base and Training Squadron NINE. Author of several published papers on energy and energy security.

]]>http://www.energytrendsinsider.com/2017/03/28/the-peak-oil-estimate-you-wont-believe-a-tale-of-two-sigmoids/feed/68The Ethanol Industry Braces For Impacthttp://www.energytrendsinsider.com/2017/03/10/the-ethanol-industry-braces-for-impact/
http://www.energytrendsinsider.com/2017/03/10/the-ethanol-industry-braces-for-impact/#commentsFri, 10 Mar 2017 22:33:40 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19605Last week the Renewable Fuels Association (RFA) reported that President Trump is preparing to direct the Environmental Protection Agency (EPA) to make a big change to the country’s Renewable Fuel Standard (RFS). The change is one that has been long sought by refiners, but it has been resisted by the country’s biofuel industry. Today I will attempt to explain what it all means.

Briefly, the U.S. has certain biofuel mandates in place. To track compliance, renewable identification numbers (“RINs”) are assigned to biofuels as they pass through the supply chain. Ultimately, those defined as “obligated parties” are required to submit their quota of RINs to the EPA to demonstrate compliance.

Compliance can be met by purchasing the fuel with the associated RIN, or simply purchasing the RINs (which can be separated from the associated biofuel). This means that there is a value for RINs that has the effect of offsetting some of the production cost for the biofuel producer. This system subsidizes biofuels at the expense of both the obligated parties and the final consumer.

Most oil companies and refiners loathe biofuel mandates, but this particular issue revolves around the definition of “obligated party.” Valero is the largest refiner in the U.S. and an obligated party under the current system. Even though the company produces some of its own ethanol, RIN compliance cost the company $750 million in 2016. To put that number in perspective, Valero reported 2016 adjusted net income attributable to Valero stockholders of $1.7 billion.

Valero and other refiners want to redefine “obligated party” to mean the entity that holds title to the fuel immediately prior to sale from the bulk transfer/terminal system to a wholesaler, retailer or ultimate consumer. These are the same entities required to report federal excise tax liability for the gasoline or diesel they sell. (See Valero’s petition for the rule change here).

Valero’s primary objection to being an obligated party is that refiners are not (necessarily) the final blenders of fuel, and therefore they may have no direct impact on how much ethanol gets blended into the fuel. The entity that actually blends the fuel and sells it into the marketplace has the greatest power to actually meet the obligation, and they should therefore be obligated, and thus incentivized, to do so. Valero also asserts that such a change would substantially reduce the opportunity for RIN fraud and RIN speculation because the parties with the obligations would be those who separate the RINs from the fuel and must turn them in.

Who opposes such a move? The fuel marketers and retailers, who in many cases are making profits by selling RINs back to the refiners. Then there are various renewable fuel groups. I think their primary fear is that putting that large compliance obligation on smaller businesses (as opposed to multi-billion refiners) could cause a backlash against the entire idea of renewable fuel mandates. It would open a can of worms they would rather leave closed.

So what’s going to happen? The White House denied that such an order is pending, but Carl Icahn has been a vocal critic of the current system. He is the majority owner of refiner CVR Energy. More importantly, he is advising President Trump on the issue.

Expect the change to happen. It’s likely to hurt ethanol companies in the long run and should improve the fortunes of some refiners at the expense of marketers and retailers. Ultimately, the change is going to put the spotlight on the nation’s biofuel mandates, and it may just be the tip of the iceberg.

]]>http://www.energytrendsinsider.com/2017/03/10/the-ethanol-industry-braces-for-impact/feed/4Meltdown At Gevohttp://www.energytrendsinsider.com/2017/02/25/meltdown-at-gevo/
http://www.energytrendsinsider.com/2017/02/25/meltdown-at-gevo/#commentsSat, 25 Feb 2017 17:49:42 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19594I am currently reading the book The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters. The excess and greed of a few of those profiled is mind-boggling. Of particular note, the late Aubrey McClendon nearly ruined Chesapeake with his excessive spending. But after presiding over a huge decline in Chesapeake shares he got margin calls and his personal shares were sold out from under him. So he turned around and did some self-dealing with Chesapeake that benefited himself enormously financially, at the expense of shareholders.

The greed was excessive, but in his defense he and Chesapeake co-founder Tom Ward (whose self-dealing was also highlighted in the book) did create a multi-billion dollar company from scratch that became one of the leading energy producers in North America. It doesn’t excuse the fact that he did things out of self-interest that weren’t in the best interest of shareholders, but the company itself did provide a lot of energy to consumers.

The same can’t be said of advanced biofuel company Gevo, one of three advanced biofuel companies that went public in 2010-11 with the backing of billionaire venture capitalist Vinod Khosla.

It has been almost exactly 6 years since Gevo’s IPO in February 2011. If you had invested $10,000 in Gevo at the IPO and left it there, today that investment is worth about $2.20. You wouldn’t have enough left to buy a Big Mac. Presiding over the destruction of shareholder value while personally enriching himself was part of McClendon’s story. But Chesapeake did enjoy profitable years under McClendon’s guidance, and its market capitalization was once $25 billion.

Gevo CEO Pat Gruber has presided over a 99.98% destruction of shareholder value. His reward? He receives total compensation of more than $1 million a year, including bonuses worth hundreds of thousands of dollars each year. McClendon’s board was criticized as being very compliant with his demands. I can only imagine that Gevo’s board is also pretty compliant. Otherwise it’s hard to understand why a board would not request Gruber’s resignation given the share performance under his guidance.

So far Gevo has managed to stay in business by screwing over its existing shareholders.

For years, Gevo has burned through cash, and then raised money by simply issuing new shares when cash was dwindling. The pattern was predictable. They would frequently issue some feel good piece of news about the future outlook. On the strength of the positive news (which rarely if ever had any near-term positive impact on cash flow), they would then issue new shares — which would tend to crash the share price. Wash, rinse, repeat all the way down. Existing shareholders were diluted to oblivion.

I predicted in January 2014 that KiOR would be bankrupt by year-end, which did happen. I considered following that up in 2015 with a prediction that Gevo would be bankrupt by year-end, but they weren’t going to throw in the towel as long as they could still raise money by issuing new shares. So, while I thought they would go bankrupt, the timing was uncertain.

But the end may now be near.

On their way to zero, Gevo has done two reverse splits to prop the price of the shares back up, so they would meet the NASDAQ listing requirements. In 2015 they did a 1-for-15 reverse stock split, but shares continued to decline. Last month the company did a 1-for-20 reverse stock split, and again shares continued to decline.

Late last month the company announced that the EPA had approved their isobutanol as an advanced biofuel, which means it is eligible for lucrative tax credits (but low fuel volumes mean the near-term impact is nominal). Then the company announced that a lender had granted them more time to pay back a loan. I joked with a friend earlier this month “It looks like they are setting up for another round of dilution.”

Then Gevo announced that it has entered into a Letter of Intent (LOI) with HCS Holding GmbH to supply isooctane under a five-year off-take agreement. But at the same time the company once more shafted existing shareholders. After the close on February 13th, Gevo announced a new $11.9 million public offering of common stock and warrants. A Valentine’s Day massacre ensued.

Shares that were still above $3 a share in early February (as a result of the recent reverse split) dipped to 92 cents this week. Shares have subsequently recovered back to $1.09, but the company will soon once again be fighting to maintain its NASDAQ listing. The company shed value so quickly in response to the offering that the current market cap of $14.9 million is barely above the value of the offering.

So far I haven’t said a word about the viability of Gevo’s process. As someone who spent years producing isobutanol commercially as a chemical engineer for a major chemical company, I do have some thoughts about their technical and economic viability. But that’s a longer discussion for another day. The share price speaks for itself.

For now, Gevo will likely continue with the tactic that has served them well: rosy press releases and new stock offerings. And that will keep them in business as long as investors continue to purchase the offerings. It’s amazing how long they have managed to execute this strategy, but it validates my decision not to predict bankruptcy in 2015. This “dead man walking” has mastered the art of slowing that walk to a crawl. Maybe Gruber should be commended for managing to keep the company afloat. But existing shareholders are getting shafted in the process.

]]>http://www.energytrendsinsider.com/2017/02/25/meltdown-at-gevo/feed/37Can U.S. Shale Oil Offset OPEC Production Cuts?http://www.energytrendsinsider.com/2017/02/06/can-u-s-shale-oil-offset-opec-production-cuts/
http://www.energytrendsinsider.com/2017/02/06/can-u-s-shale-oil-offset-opec-production-cuts/#commentsMon, 06 Feb 2017 16:35:14 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19585In an earlier article - Why OPEC’s Announced Cuts Are A Really Big Deal - I addressed some of the skepticism around the recent production cuts enacted by OPEC. Today I want to consider in more depth the notion that U.S. oil producers might swiftly negate the impact of these production cuts.

To review, in November OPEC announced that it would enact 1.2 million barrels per day (bpd) of production cuts on January 1st. OPEC also announced that certain major non-OPEC members – most notably Russia – would cooperate with the production cuts, pushing the total amount of targeted cuts to 1.8 million bpd.

Some analysts cite two factors that could render OPEC’s cuts ineffective. The first is simply that OPEC members will cheat, as they have historically done. Certainly some members may overproduce their quotas, but OPEC is going to monitor global crude inventories. Those inventories had already begun to come down from record highs prior to the OPEC announcement, partly in response to declining U.S. shale oil production.

Further, a new Reuters survey has determined that OPEC’s compliance with the cuts in January was 82%. Tanker-tracker Petro-Logistics has estimated that crude oil shipments from OPEC countries were down by 900,000 bpd in January. So, early indications are that even if some cheating does occur, substantial cuts have taken place.

But the second factor cited by skeptics is beyond OPEC’s control, and that is that U.S. shale oil producers will simply ramp up production as oil prices rise, negating the OPEC cuts. That’s a reasonable concern, so let’s delve a bit deeper.

At the height of the shale boom, U.S. producers were adding more than a million bpd of oil production each year. At that growth rate, the production cuts could indeed be offset in a couple of years. But a look at the relationship between the number of oil rigs drilling for oil and oil production at first glance implies that a rapid turnaround is unlikely:

Between about 2000 and 2008, U.S. oil rigs doubled from around 200 to 400, but oil production hardly responded (though that was before the spread of modern shale drilling technology.) The rig count plunged in 2008 along with oil prices, but once oil rallied the rig count began a steep climb. Production did eventually respond, but there was a lag of more than a year between the start of the rig rush and a meaningful increase in oil production.

However, if you look at the last six months of the above graph, you will notice that the rig count began to climb again after bottoming last May. Meanwhile, oil production, which had been steadily falling since about mid-2015 reversed course and began to climb in October 2016.

This rapid turnaround is likely a result of a backlog of drilled but uncompleted wells (DUCs), which can be brought online faster than a new well can be planned, drilled, and completed. Data from the Energy Information Administration shows an uptick in completions over the past year in the four oil-dominant regions of the Bakken, Eagle Ford, Niobrara, and Permian Basin, where the DUC inventory in December stood at 4,509 wells. This uptick in completions helps explain why recent oil production responded more quickly than during the previous rig surge that began in 2009.

Considering this data, how soon might the U.S. manage to offset 1.8 million bpd of production cuts? If the impressive production gains since early October could be maintained, it would amount to ~1.5 million bpd over the course of a year. It’s going to be very important in coming months to see if these fast gains were a short-term response to $50 oil, or if they are sustainable.

My opinion is that the DUCs that are being completed with oil prices at $50/bbl will be among those with the highest production rates. After all, higher production rates are what enables a well to be economic to produce at lower prices. Thus it is likely that the most promising wells are being completed first, and that completion of additional DUCs is unlikely in my view to maintain that production growth for an extended period of time.

However, if by mid-year U.S. producers have added another half million bpd, OPEC may once again find themselves facing the difficult decision of responding with another round of production cuts.
Link to Original Article: Can U.S. Shale Oil Offset OPEC Production Cuts?

]]>http://www.energytrendsinsider.com/2017/02/06/can-u-s-shale-oil-offset-opec-production-cuts/feed/4My 2017 Energy Predictionshttp://www.energytrendsinsider.com/2017/01/11/my-2017-energy-predictions/
http://www.energytrendsinsider.com/2017/01/11/my-2017-energy-predictions/#commentsWed, 11 Jan 2017 21:52:09 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19564I read an article this morning where one analyst predicted that we are in a 10-15 year bear market for oil. The analyst stated that the market is oversupplied by about a million barrels per day (it isn’t — see the charts in today’s article), that shale oil production will surge this year (it won’t), and that the OPEC agreement to cut production would fall apart (it won’t). His projection was that we will spend 2017 below $50 per barrel (bbl) and in 2018 prices will be back below $40/bbl.

I disagree with this assessment. I believe we will look back in a few years at 2016 as the year the energy sector recovery got underway in earnest. I believe 2017 continues the recovery. Today, I explain how I see the energy markets shaping up this year, in the context of my 2017 predictions.

1. Crude oil will flow through the Dakota Access Pipeline (DAPL) in 2017.

Donald Trump’s surprise win in the 2016 presidential election will result in big changes in U.S. energy policy. One immediate impact will be in the support at the federal level for oil and gas pipelines. The Obama Administration implicitly encouraged opposition to high profile projects like the Keystone XL Pipeline, and more recently the Dakota Access Pipeline (DAPL). Decisions on these projects came down on the side of pipeline protesters.

With Trump in office, DAPL will be completed and oil will flow. The only real uncertainty in my mind over this prediction is that Trump comes into office pretty disorganized, and President Obama has put a lot of obstacles in front of him. He will have a lot of competing priorities, and there will be legal challenges. Those will take some time to sort out. Nevertheless, I expect the pipeline to be completed and the oil to flow this year, much to the chagrin of pipeline protesters.

2. The price of WTI will average at least $15 per barrel higher than in 2016

I feel compelled to make an oil price prediction, but this year is much more difficult than a year ago, when I was confident that there would be a strong move upward from $30/bbl. This year I think oil prices will continue to move up, but a lot of optimistic expectations are already factored into the price.

According to data from the Energy Information Administration (EIA), the average closing price for West Texas Intermediate Crude (WTI) in 2016 was $43.31. During the year the price closed as low as $26.19 and as high as $54.01. The EIA’s most recent Short Term Energy Outlook projects Brent Crude prices to average $51.66 and WTI Crude prices to average $50.66 this year, but some are predicting a return to $40 or lower in 2017.

As I write this, WTI is trading at $50.81 and Brent is $53.62. This prediction will require the price of WTI to average at least $58.31 for the year, which is an average that is 15% above the current price, and also currently above the futures price of every contract trading in 2017. This prediction is essentially a bet that the OPEC production cuts will largely hold, which will minimize the risk of a strong downside move. However, there are headwinds to the upside. Even now the U.S. rig count is increasing, and while it is still only a third of the highs of 2014, it is up 60% since summer and will continue to rise alongside oil prices.

Crude oil inventories are still high, but the International Energy Agency’s most recent Oil Market Report showed that they were trending down even before the OPEC announcement to cut production:

Source: International Energy Agency

It is certainly true that a couple of years ago there were a couple million barrels per day (bpd) of oversupply, but falling U.S. shale oil production and another year that added >1 million bpd of demand had roughly balanced the market in the 2nd half of the year:

Source: International Energy Agency

As a result, I think this will be a less volatile year for oil, with dampers on the high as well as low side. We should reach $60, and I think OPEC is targeting at least that level. But it is hard to convincingly argue that the annual average will go that high (admittedly even $58.31 is a stretch for a yearly average) considering the current price, the fact that global crude inventories are still extremely high, and the expected increase in U.S. shale oil production.

This is a prediction that hinges on many factors, which makes it all the more difficult. If by the second quarter it is clear that global crude inventories are coming down rapidly, then I think we will see a $60 average for WTI for the year. However, if we see the OPEC agreement start to fall apart, we will likely retreat back to the $40s temporarily. So while some may not consider this an extremely aggressive prediction, it is a difficult forecast that could look silly in hindsight depending on how events play out.

3. The average Henry Hub spot price for natural gas will be above $3.50/MMBtu

In 2016 the average spot price of Henry Hub natural gas was $2.52 per million British thermal units (MMBtu). But by year-end the price was surging in response to depleting inventories. At present the forward price curve for natural gas in 2017 ranges from about $3.13 per MMBtu up to about $3.37, before falling back below $3 in early 2018. This seems too low given the strong demand growth coming online from new petrochemical projects, the utility sector, liquefied natural gas exports and growing pipeline exports to Mexico. Demand has been growing for years, but production growth has kept pace, keeping prices depressed. Natural gas production stalled in 2016 in response to low prices, and although I think it will bounce back this year I think this year we see demand get the upper hand.

The weather always has a strong influence on gas prices, but unless there is an extended bout of mild weather it will be hard to keep natural gas prices near current levels. I believe natural gas has more upside than oil in 2017, and that the average closing Henry Hub spot price will be above $3.50 for the year.

4. U.S. oil output will offset less than a quarter of the announced OPEC production cuts

From 2011 through 2015, U.S. crude oil production increased by 4.85 million bpd — an average increase each year of ~1.2 million bpd. OPEC’s 2014 decision to defend market share had a chilling impact on oil prices, with U.S. oil production entering a year-over-year decline in April 2015 that continued in 2016.

OPEC’s recent decision to cut production has many predicting that U.S. shale oil producers will simply ramp up drilling, replacing the 1.2 million bpd that OPEC members agreed to cut. Some have predicted that producers could offset the entire production cut in 2017, while others (like Citigroup) see the potential for a 500,000 bpd offset if oil prices climb to $60/bbl.

I believe these projections are quite optimistic for 2017. Shale production declined by ~600,000 bpd from 2015 to 2016, and while production was turning back up at the end of the year, I don’t believe it will ramp up rapidly, for several reasons. Shale oil production will likely increase, but it can’t turn on a dime. My prediction assumes that in 2017 U.S. crude oil production will grow by less than 300,000 bpd (a quarter of the announced OPEC cut) above the average daily crude oil production level in 2016 of some 8.8 million bpd.

5. The total return of the Alerian MLP Index will be at least 20% in 2017

Last year I predicted that the Energy Select Sector SPDR ETF would rise at least 15% in 2016 as the energy sector began to recover. The XLE rose 27% on the year amid a broad energy sector recovery.

I expect to see further gains this year in the XLE, but one group that lagged last year’s energy surge was the MLPs — the master limited partnerships that still predominate among the midstream operators. The Alerian MLP Index (AMZ) was up 9% for the year, while yielding about 7%. That wasn’t terrible, but it was well behind the rising energy tide.

I expect President Trump to be extremely good for MLPs and the entire midstream space. Over the past eight years the Obama Administration has created a tough climate for energy pipelines. The resulting negative sentiment is one of the factors weighing down midstream equities. I think we will see a great deal of top-down political support for the midstream sector over the next four years, and as a result I firmly believe MLPs will do very well in 2017. I expect the total return of the Alerian MLP Index — which consists of the price return of the AMZ and the distributions by its components — to reach at least 20% in 2017.

Conclusions

There you have my 2017 energy predictions. I believe the themes this year will be upward pressure on oil prices, U.S. shale oil producers picking up production a bit in response to the uptick in prices, increasing momentum for natural gas demand and a much friendlier federal approach to fossil fuel development. I will provide regular updates to these predictions as appropriate, but these are the final predictions I will grade myself on at the end of the year.

Finally, please note that these are my opinions and should not be considered as investment advice. Feel free to utilize my opinions as part of your due diligence process, but don’t rely on that exclusively. Predictions aren’t guarantees, so sometimes you may lose money. Not most of the time (historically), but just keep in mind that your investment decisions are your own.

]]>http://www.energytrendsinsider.com/2017/01/11/my-2017-energy-predictions/feed/9Fact-Checking Snopes On Las Vegas And Renewable Energyhttp://www.energytrendsinsider.com/2017/01/07/fact-checking-snopes-on-las-vegas-and-renewable-energy/
http://www.energytrendsinsider.com/2017/01/07/fact-checking-snopes-on-las-vegas-and-renewable-energy/#commentsSat, 07 Jan 2017 15:55:18 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19529When I hear a claim that doesn’t sound quite right to me, I usually check in at Snopes to get the facts. They usually do a good job of debunking fake news, and they provide lots of references to back them up.

However, I think they did a huge disservice to readers recently with their fact check on a viral story about Las Vegas.

The story going around was that Las Vegas is now completely powered by renewable energy. The story contains a kernel of truth, but then that kernel got distorted into something that went viral, but was clearly untrue.

Why does it matter? Because when people start to believe energy myths, they start to have unrealistic expectations. That leads to bad energy policies. After all, if the glittering lights of Las Vegas can run entirely on renewable energy, there is no reason we can’t run the entire country on renewable energy. While it’s fine to have that as a target, if we start to base energy policies on that expectation, we are likely to create energy shortages.

The kernel of truth was a story about the city government of Las Vegas. The story first reported by the Las Vegas Review-Journal was City of Las Vegas reaches clean energy goal. In that story, they explain that the city government in Las Vegas has been moving toward running totally on renewable energy. Here is the key piece of information: “Through a combination of direct generation and credits, the city is powering more than 140 facilities, along with streetlights, with renewable sources.”

So the city government is now running its ~140 facilities on renewable power. Then, whether through careless reporting, incompetence, or intentionally misleading readers with click bait, that story morphed from “City of Las Vegas” to “city of Las Vegas” to simply “Las Vegas is running on renewable energy.” To emphasize that point, many stories ran a picture of the Las Vegas Strip with the accompanying headline.

One of the worst offenders was Popular Mechanics, which had the following up for four days before modifying the title and issuing a “clarification:”

Not only are the headline and subtitle of this story completely false, but the Las Vegas Strip isn’t within the City of Las Vegas. Thus, nothing you see in that picture was actually covered by the announcement by the City of Las Vegas.

Nevertheless, that headline was repeated verbatim in the mainstream media, and the story went viral. One version of the story I saw had 1.2 million views. As one might expect, Snopes fact-checked it. And they got it wrong.

The claim they fact-checked (at this link) was “The city of Las Vegas is now powered completely by renewable energy.”

Although within the fact-check they clarified that it is only the “municipal buildings and facilities” of the “city of Las Vegas”, they rated the claim “Mostly True.” In fact, as read and passed around it is “Mostly False” or “Barely True.” Instead of pointing out that many stories actually got it completely wrong, they put the blame on readers who just glanced at headlines and “may have come away with the mistaken impression that the glittering array of brilliantly-lit hotel/casinos that populate the famous Las Vegas Strip are now all impressively powered entirely by renewable energy sources.”

I am sorry, that just isn’t acceptable. Readers came away with that impression because media outlets blatantly made that claim with accompanying pictures of the Las Vegas Strip. Had Snopes fact-checked “The City of Las Vegas…” they would have been on firmer ground, but readers would still need some clarification of what “City” means in this instance. But that wasn’t the claim that went viral. It was “city of Las Vegas” or simply “Las Vegas.”

]]>http://www.energytrendsinsider.com/2017/01/07/fact-checking-snopes-on-las-vegas-and-renewable-energy/feed/11Grading My 2016 Predictionshttp://www.energytrendsinsider.com/2017/01/01/grading-my-2016-predictions/
http://www.energytrendsinsider.com/2017/01/01/grading-my-2016-predictions/#commentsSun, 01 Jan 2017 16:18:36 +0000Robert Rapierhttp://www.energytrendsinsider.com/?p=19536Almost a year ago I made my 2016 energy predictions (see “My 2016 Energy Predictions.”) I have been making annual predictions for nearly a decade now, primarily as a framework for sharing my views on energy markets in the coming year. I try to make predictions that are specific, measurable and actionable. I prefer not to leave anything open to interpretation or spin. With few exceptions, at the end of the year a prediction is right or it is wrong.

I try not to make “no-brainer” predictions. When I make these calls, there is a fair level of uncertainty around them.

Although I had one high-profile miss this year, the others were mostly correct. Here they are, along with commentary on each.

1. U.S. oil production will suffer an annual decline for the first time in eight years.

This was the closest to a “no-brainer” of any of my predictions. When I made it, I indicated that I had the highest confidence level that this one would come true. In fact, oil production started to decline in 2015 (even though 2015 annual production was still above the 2014 total), and the only thing that I thought would have turned it around was an early 2016 surge in oil prices.

Instead, oil prices weakened further in the first quarter, and the production decline that began in April 2015 continued throughout 2016. Between January and September of this year production fell by more than 600,000 barrels per day (bpd). Since September, production has trended back up, but is still well below the 2015 average of 9.4 million bpd. Final numbers won’t be released by the Energy Information Administration (EIA) for a couple of months, but based on monthly data through September and the weekly reports released by the EIA, 2016 oil production is going to come in at about 8.8 million bpd.

So this prediction was totally correct.

2. The closing price of the front month West Texas Intermediate (WTI) crude contract will reach $60/bbl in 2016.

I noted when I made this prediction that it was extremely aggressive. When I made the prediction the front month contract for WTI traded at $36.14/bbl, and no front month contract during 2016 traded above $43.73/bbl. Thus, this prediction would require a gain of 66% to be correct.

Given the aggressive forecast, I also said when I made the prediction that I would grade this one on a curve, and would only consider it a failure if WTI failed to crack $50/bbl. The front month contract for WTI closed the year at nearly $54/bbl, and traded up to $55.44. The price has risen about 50% since I made that prediction. Not a perfect prediction, but directionally right for a very aggressive prediction made at a time many were forecasting no price recovery in sight. If you made a bet on rising crude prices, you won that bet.

This one wasn’t perfect, but it was mostly correct.

3. U.S. natural gas production will suffer an annual decline for the first time in 11 years.

While U.S. natural gas production set another record in 2015 — the 10th straight annual increase — my reasoning was that low prices would finally dent output. More people challenged this prediction than any other, with some assuring me I was underestimating the resilience of the Marcellus shale. I wasn’t.

So what happened? Production stayed above the year-ago levels until March, but since then has been down year-over-year every month. Production in 2015 was a record 74.1 billion cubic feet per day (Bcf/d). Through September, that has fallen to 72.9 Bcf/d. By early December, the weekly numbers had fallen to below 72 Bcf/d, so 2016 natural gas production will indeed be below 2015’s record, snapping a 10-year streak of gains. This (along with a cold winter thus far) has helped natural gas prices recover from the lows of earlier in the year.

The Energy Select Sector SPDR ETF represents the largest energy companies in the S&P 500. Its top holdings include supermajors like ExxonMobil and Chevron, and large shale oil producers like EOG Resources and ConocoPhillips. It is a good index for conservative investors of large-cap energy companies.

When I made this prediction I noted that fundamentals would ultimately win out, and that the energy sector’s prospects should start to improve before the end of 2016. Indeed they did. Rising oil and gas prices helped the XLE rise by 15% by mid-year, and at year-end it had risen 25% for the year. I full expect more gains in 2017.

This one was completely correct.

5. Hillary Clinton will win the 2016 presidential election.

Sometimes the reasoning behind a prediction turns out to be as important as the prediction itself. It is possible to get a prediction wrong, but the logic behind the prediction helps to inform decisions about the market.

That was not the case here.

My reasoning was that Clinton would beat Sanders in the Democratic primaries, which she did. And that the Republican nominee would have enough negatives to end up outpolled. Ironically, that also came true as Clinton won the popular vote by nearly 3 million votes. But we don’t elect on the basis of popular vote.

Still, I believe (as polling guru Nate Silver has also attested) that Clinton would almost certainly have won had FBI Director James Comey not put his thumb on the scale 10 days before the election. There were a number of factors leading to her loss, but that one was huge. Her poll numbers dropped steeply just before the election and never recovered. I can rationalize that my instincts on this were mostly correct, but were likely undone by an unprecedented move by the FBI director.

But none of that matters. This is a binary prediction, either right or wrong. There is no “almost” in such a prediction. What matters is that the purpose of the prediction was to predict energy policy, and getting it wrong means that energy policies are going to go in a vastly different direction than I expected. At the end of the day, all that mattered was that it was wrong.

So even though I believe the logic of the prediction was entirely defensible, this one was 100% wrong.

Conclusions

Despite the high-profile miss on the presidential election, my instincts proved to be completely or mostly right on the other four predictions. Falling oil and gas production, rising oil prices, and a recovering energy sector were all major themes that played out during the year. Next week I will attempt to guess what we may see in 2017.